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Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options
Abstract
This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This article explains the presence and evolution of risk-neutral skewness over time and in the cross section of individual stocks.
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Citations
Cites
Prospect Theory: An Analysis of Decision under Risk
Kahneman, D., & Tversky, A. (1979) · Econometrica · doi:10.2307/1914185 · Cited by 48,524
Cited by
Ilhan, E., Sautner, Z., & Vilkov, G. (2021) · The Review of Financial Studies · doi:10.1093/rfs/hhaa071 · Cited by 1,136
Ilhan, E., Sautner, Z., & Vilkov, G. (2018) · SSRN Electronic Journal · doi:10.2139/ssrn.3204420 · Cited by 1,136
BOLLERSLEV, T., & TODOROV, V. (2011) · The Journal of Finance · doi:10.1111/j.1540-6261.2011.01695.x · Cited by 804
The Price of Political Uncertainty: Theory and Evidence from the Option Market
KELLY, B., PÁSTOR, Ľ., & VERONESI, P. (2016) · The Journal of Finance · doi:10.1111/jofi.12406 · Cited by 760
What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?
Xing, Y., Zhang, X., & Zhao, R. (2010) · Journal of Financial and Quantitative Analysis · doi:10.1017/s0022109010000220 · Cited by 710
Metadata
- Authors
- Bakshi, G., Kapadia, N., & Madan, D.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 2003-01
- Volume
- 16
- Issue
- 1
- Pages
- 101-143
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W3121239128
- Cited by
- 1,353
- References
- 1
- FWCI
- 33.67
- Type
- journal article
- Language
- en
- Open access
- closed
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- Bakshi, G., Kapadia, N., & Madan, D. (2003). Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options. Review of Financial Studies. https://doi.org/10.1093/rfs/16.1.0101
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
